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Ottawa to close loopholes used by rich to dodge tax

OTTAWA—The federal government is taking aim at Canadians who use private corporations to dodge taxes, promising to close regulatory loopholes that allow a select few who can afford “fancy accounting schemes” to pay less into the public purse.

Finance Minister Bill Morneau launched a 75-day consultation period on the government’s proposed changes Tuesday, identifying three loopholes they intend to close.

The idea is to curb what the Finance Department describes as an accelerating trend in which people are using privately owned businesses to avoid paying their full share of personal income taxes, which are significantly higher than the corporate rates in Canada.

“This is becoming an even more pressing issue,” Morneau said during a news conference in Ottawa.

He said the number of Canadian-controlled private corporations has jumped by 50 per cent since 2001 — his department says there are now almost two million in Canada, eight times higher than the 240,000 there were in 1972 — while the share of gross domestic product they represent has doubled in the past 15 years.

Morneau acknowledged “unfair tax advantages” in the current system and said the proposed measures are meant to help the “middle class” Canadians who the Liberal government routinely pledges to be fighting for.

“This isn’t about a business not paying its share; it’s about people using a corporate structure to shield their income and gain a tax advantage,” Morneau said.

“Some people may be paying less than their fair share for the essential services that Canadians rely on.”

In recent years, antipathy toward the richest “1 per cent” and a sense of economic injustice have fuelled demonstrations such as the Occupy Movement, while last year’s revelations of the Panama Papers brought global tax evasion practices out of the shadows. The Star’s reporting on the papers showed how wealthy Canadians have covertly stashed billions of dollars in off-shore tax havens to avoid paying their share to Ottawa and the provinces.

“This isn’t about a business not paying its share; it’s about people using a corporate structure to shield their income and gain a tax advantage,” said Finance Minister Bill Morneau. (Adrian Wyld / THE CANADIAN PRESS file photo)

The loopholes addressed in Tuesday’s announcement, however, pertain only to dodging taxes through the use of private corporations.

The first loophole involves so-called “income sprinkling,” which sees people shift portions of their income to other family members within their private corporation. This allows them to avoid paying tax in higher brackets, and sometimes even personal income taxes altogether on some of their earnings, the Finance Department says.

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The government is proposing to create a new “reasonableness test” to ensure that income is transferred to family members for legitimate reasons, not just to spread money to pay lower taxes. The test already exists for family members who are 17 or younger. It will be extended to all adults and a stricter version will apply to people between 18 and 24 years old.

The Finance Department estimates that 50,000 families in Canada are dodging taxes through income sprinkling.

It says the government could reap $250 million a year with a new reasonableness test.

The second loophole addressed Tuesday involves “passive income” that accrues from investments parked within a private corporation. In this way, investments can grow shielded from higher personal income taxes, an arrangement Morneau described as a “tax-advantaged personal savings account” that is “unintended and unfair.”

He emphasized that any new measures will not affect private corporations making “active” investments to grow their business, such as by purchasing new equipment.

The final loophole sees wealthy Canadians transform portions of their income into lower-tax capital gains earnings.

The government is seeking input on how to close the passive income and capital gains loopholes, and Morneau said it plans to move toward legislation as quickly as possible once the consultation period ends on Oct. 2.

In a statement following Morneau’s press conference, New Democrat MP Pierre Luc-Dusseault, the party’s national revenue critic, panned the proposed consultations for “ignoring the larger issue of tax evasion.”

He said: “There is nothing concrete and no guarantees of specific measures in this Liberal announcement …

“They are failing to act on a key campaign promise to close the stock-option loophole.”

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